Meritage Homes Corp (MTH) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Meritage Corporation second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Oshiki, you may begin your conference.

Thank you, operator, and good morning, everyone. Welcome to the Meritage Homes conference call to discuss operating results for the second quarter and first half of 2005. On this conference call, you may also follow along with the slide presentation that can be accessed through the Company's website at www.MeritageHomes.com.

Participating on the call today from the Company's management are Steve Hilton and John Landon, Co-chairman and Chief Executive Officers; and Larry Seay, Chief Financial Officer.

Before we start, I'd like to remind everyone that during the course of this conference call, certain projections and other forward-looking statements may be made regarding future events or the future financial performance of the Company. We refer you to the disclosures that the Company files with the Securities and Exchange Commission, specifically those contained in the Company's most recently filed Form 10-K and 10-Q and its second-quarter earnings press release. These documents describe important factors that may cause actual results to differ materially from those contained in any projections or forward-looking statements made during this conference call. We also refer you to Meritage's second-quarter press release for the definition and discussion of the use of EBITDA and other non-GAAP financial measures.

I will now turn the call over to Steve Hilton.

Good morning, and thank you for joining us as we discuss Meritage's results for the second quarter and the first half of 2005. In today's presentation, we will recap our performance, review our balance sheet, return measures and liquidity, and we'll also discuss our outlook for the remainder of 2005. After that, we will be happy to answer your questions.

We begin the presentation on slide number four. For the second quarter of 2005, we set all-time quarterly records for net earnings, diluted earnings per share, the dollar value of sales orders and the dollar value of order backlog. We also set second-quarter records for home closings, home closing revenues and new home orders. Most notably, net earnings rose 140% from the second quarter of 2004 to this year's second quarter, and the diluted EPS rose 130%. For the first time in our history, the dollar value of sales orders reached $1 billion for a quarter. And also, for the first time ever, the value of homes in backlog eclipsed 2 billion, advancing 83% from the same point last year to 2.1 billion. As a result of our ability to raise prices while effectively managing costs, gross margin advanced 500 basis points this quarter to 23.4%, up from 18.4% during the same period a year ago.

Slide five -- home closing revenue increased 51% over last year's second quarter, and the number of homes closed was up 29%. Closings continue to be particularly strong in California and Arizona. In Arizona, home closings rose 58%, while the dollar value of those homes increased 68%. In California, where demand for housing remains high, along with a constrained land supply, the number of homes closed was up 29% while the value of those homes advanced 84%. While California generated the most revenue for the Company during the quarter, Texas generated the most closings. Considering the competitive nature of the Texas home-building market and the already strong market penetration we have there, we are pleased with our achievement of a 15% increase in the dollar value of the Texas closings, and believe that this rate of growth in Texas is sustainable. Although closings declined 41% in Nevada this past six months, as compared to the same period earlier, we anticipate growth in closings in the second half of this year.

Slide six -- we generated 1.2 billion in home closing revenues during the first six months of the year, up 41% from the same period a year ago, while the number of closings increased 22% to 3,882 for the same period.

Slide seven -- not only were closings strong in the second quarter, but they were also robust for the first six months of the year. Overall, home closings rose 22% over the first six months of 2004 through the first six months of this year, and home closing revenue advanced 41%.

Slide eight -- the average price of homes closed during the second quarter of 2005 compared to the second quarter of 2004 increased by 17%, primarily the result of a greater percentage of closings coming from California, which generally has higher pricing levels than the rest of our regions.

Slide nine -- as a result of our ability to raise prices in certain markets while effectively managing our construction and land costs, gross margin rose a robust 500 basis points from 18.4% for 2004's second quarter to 23.4% in this year's second quarter. Gross margin increased 359 basis points from 19% in the first half of last year to 22.6% in the first half of this year.

Slide ten -- diluted earnings per share for the second quarter reached an all-time quarterly record of $2.05, rising 130% above last year's second quarter. For the first half of 2005, diluted EPS reached $2.92, a 59% increase over the first half of last year. Excluding the impact of the first-quarter bond refinancing charge of 19.5 million net of taxes or $0.69 per diluted share, diluted EPS would have risen 96% to $3.61 for the first half of the year. This bond refinancing, where we purchased 276.8 million of our 9.75% senior notes due 2011 and replaced them with 350 million of 6.25% senior notes due 2015 is expected to generate approximately $9 million a year of annual savings in interest payments.

I will now turn the call over to Larry Seay to discuss our balance sheet in more detail.

Thanks, Steve, and good morning, everyone. As we have often said in the past, balance sheet management is very much of a focus for us. We strive to maintain a low-risk business model while maximizing returns to our shareholders. You can see on slide 11 at June 30, 2005 we had approximately 1.2 billion in real estate inventory, a 50% increase over the same time last year. This increase was mostly caused by an increase in presold homes under construction, driven (ph) by our 83% rise in the dollar value of our backlog.

Our trailing 12-month inventory turnover ratio was 1.9 times, stable as compared to a year ago. For the 12 months ended June 30, 2005, our after-tax return on equity was 31.1%, up from 26.9% a year earlier. And our after-tax return on assets increased to 12.8% from 11% a year ago.

On slide 12, you can see that our net debt to capital ratio improved to 43% at June 30 of this year from 50% on the same date in 2004. Debt to trailing third quarter EBITDA ended June 30th improved from 2.2 times last year to 1.7 times this year. Our trailing fourth quarter ended June 30th EBITDA to interest incurred ratio also improved from 6.7 times last year to 7.9 times this year. This improvement was caused in part by our lower leverage position and by a decrease in our average borrowing rate from our new bond issue and tender. We believe that our balance sheet and liquidity position provides us with significant resources to use in further expanding Meritage. We presently have 480 million of senior notes outstanding, as compared to 418 million from a year ago.

At June 30th, 2005, we had 38 million outstanding on our 400 million bank credit facility, leaving 262 million unused, of which 301 million was available to borrow after considering our borrowing base limitations and our most restrictive bank covenants.

I will now turn the call over to John Landon.

Thank you, Larry, and good morning, everyone. Slide 13 -- demand for our homes remains quite strong. In many western markets like California and Nevada, the limited supply of buildable land coupled with population growth supports robust housing markets. In Arizona, we are limiting our sales orders in the face of strong demand, in order to match sales to production capacity and to maximize profits.

Overall, the number of homes ordered increased 15%, and the dollar value of orders rose 44% from the second quarter of 2004 to the same quarter this year. Unit orders in Arizona declined slightly quarter over quarter, due to the aforementioned limiting of sales there. However, the dollar value of sales orders rose 20% in Arizona, due to a 30% increase in average selling price, to approximately $322,000 per home. In California, a 45% increase in sales orders and a 72% rise in their value reflects the robust demand in that market. Sales orders in our Nevada division rose 143% over the second quarter of 2004, due to the strong market and the addition of several new actively selling communities in Las Vegas this year. As with closings, Texas generated the highest volume of sales orders for the Company, with improvements in the number of orders and the respective dollar value over the same period in 2004.

Slide 14 -- sales orders for the first six months of this year, as compared to the first half of last year, have risen at about the same rates as the second-quarter increases, including an overall 46% increase in the dollar value of sales orders.

Slide 15 -- for the first time in Meritage's history, we ended a quarter with more than 2 billion in order backlog. At June 30, 2005 we had nearly 6,500 homes in backlog with a value of 2.1 billion, 83% higher than the 1.2 billion at the midway point of 2004. Our backlog is well-distributed across all divisions, and we are confident that we have the capacity to convert approximately 85% of our June 30, 2005 backlog into closings during the second half of the year. This supports our revenue projection of 2.9 to 3 billion for the full year 2005. The dollar value of homes in backlog at June 30, 2005 exceeds the prior year's level in all of our markets by at least 25%.

Slide 16 -- the number of communities in which Meritage is actively selling was up 19% from the end of last year's second quarter versus the same time this year. Supporting the robust order demand in California is a 29% increase in communities over the past 12 months. In Texas, we increased our community count 13%, from 87 to 98. And in Nevada, our actively selling community count doubled from three at June 30, 2004 to six at June 30, 2005. Our community count in Arizona remains stable as compared to a year ago. However, we anticipate opening another eight to ten communities in Arizona during the second half of 2005, representing an increase of approximately 30% over the last six months of the year. And overall, we anticipate increasing our community count by about 15% over the remainder of the year to approximately 185 to 190 actively selling communities by December 31, 2005.

Slide 17 -- at June 30, 2005 we controlled approximately 50,000 lots, representing an approximate five and a half year supply based on full-year projected 2005 closings. This represents an increase in lots of 41% over the June 30, 2004 level. Approximately one-half of this increase occurred in our newer markets, where we are building lot inventory to support our rapid growth plan. Of particular note is the 5,500 lots we now control in Florida, just eight months after we announced our strategic entry into that state. We consider our newest Florida divisions, Orlando and Fort Myers/Naples, to be a great springboard for expansion in one of the country's top housing markets. We continue to utilize lot option contracts to purchase the majority of our lots, which we believe offers Meritage more flexibility and less land risk. At the end of the second quarter, we controlled approximately 90% of our lots through option contracts.

Slide 18 -- we're currently projecting home closing revenues to be in the 2.9 to 3 billion range for 2005, up 44 to 49% over 2004. Assuming future growth in the 20 to 25% range, including potential acquisitions, we anticipate reaching $6 to $7 billion in home closing revenue over the next five years.

Slide 19 -- as a result of our strong performance in the first half of the year, we're raising our full-year diluted earnings per share guidance by approximately 25% to a range of $7.75 to $8, up from our previous guidance of $6.15 to $6.40. This level of diluted EPS represents a 54 to 59% increase over the full year 2004. Excluding the impact of the first-quarter bond refinancing charge, diluted earnings per share guidance for the full year 2005 would be $8.44 to $8.65, or 68% to 73% higher than 2004. Furthermore, we expect to generate diluted earnings per share of $2.20 to $2.30 in the third quarter of 2005, 69% to 76% ahead of the third quarter of 2004.

Looking forward to 2006, we anticipate generating top-line revenue growth and bottom-line earnings growth of approximately 20 to 25% above the 2005 levels.

Steve and I remain very positive about the state of the home-building industry. We believe that recent job growth and the improving economy will more than offset any moderate interest rate increases. With our all-time record level of sales orders and backlog, our recent margin expansion and stable economic conditions, we believe that Meritage is poised for solid financial growth, and expect 2005 to be our 18th consecutive year of record revenues and earnings.

That ends our formal comments, and we will now open the floor to questions. The conference call operator will provide you with instructions on how to register your questions.

(OPERATOR INSTRUCTIONS). Stephen Kim, Smith Barney.

Obviously, a tremendous quarter. Congratulations. Great job.

My first question relates to your commissions and sales ratio. We were pretty encouraged by that level. I wanted to get a sense for whether or not there was a level, as a percentage of sales running around 5.5%, that you think it is a good level to use going forward for the remainder of the year and heading into next?

I think that that's a pretty good level. I think, with the robust demand we're seeing, we're actually being able to save a little on commissions here and there. So we have been achieving that 5.5% ratio for the first half of the year, and that's about a 50 basis point savings or so off of last year. I think that that's a pretty good number to assume for the rest of the year.

And with respect to your gross margin, also that rose very nicely, both year over year as well as sequentially. I was curious as to whether or not the backlog is harboring margins that are roughly comparable to what we saw, or higher or lower?

Well, Stephen, our projections anticipate gross margins and really a net pretax margin maybe about 50 basis points lower for the second half of the year than what we achieved during the second quarter. So I think you'll continue to see a substantial portion of that increase maintained, but we are maybe hedging our bets a little bit and saying we don't think, necessarily, that 100% of it is going to stick for the second half. But a lot of it will.

And the reason for that, I assume, would be mix shift and influx of units from a particular region?

It's a combination of various factors. We do a detailed rollup on our projections, and that's what is falling out for the second half.

Is there a particular reason that is sort of driving it, or is it just simply communities within regions located throughout the country?

I think it's just a general community mix issue.

And your ability to get positive pricing in your markets -- are there some markets that really stand out? I would assume Florida and Phoenix are probably two markets that you have that. How about some other markets?

We still have really good pricing power in Arizona, particularly in Phoenix; and the West Coast of Florida and Orlando; and California, both Southern and Northern California; and Las Vegas. I would say that Northern California is a little stronger than southern California, and Phoenix is the strongest market in Arizona. And both the Florida markets -- Vegas has cooled off a little bit, but there's still pricing power there. And we're starting to get some pricing power in Texas, as well.

Oh, really?

Not to the degree that we have in the other markets, but we're encouraged by that. I don't know if, John, you want to comment on that?

No, I think that's right. You know, before, you had to be very careful about raising prices and really even passing on some of your cost increases at the sake of maybe lowering your velocity. But we have been able to move our prices up, and our sales orders have stayed steady, as you saw, the 15% increase. So we are pretty much -- we are cautiously optimistic that we're seeing the job growth, I think, is improving in Texas. And we're seeing some improvement there.

Interesting. Great. The last question I had relates to Florida. You talked about how you were able to amass, I think you said, 5,500 lots in that market, mostly through option contracts and so forth. I was wondering if you could give us a little more detail, give us some insight as to how a builder like yourself enters a market that has already been -- one would think, as an outsider -- picked over by many other large public builders, and yet able to establish such a good beachhead so quickly. Obviously, a skeptic from the street might say, well, they've simply gone in there and overpaid. And I'm sure you would assure us that that's not the case. But can you walk us through the types of situation that enable you to get that kind of a land position without overpaying?

That's a good question. It started with the acquisition of Colonial Homes. Management had been in that Fort Myers/Naples market for many, many years. They had a lot of good local contacts.

We all have to remember, and we always do, that this is a local business. The United States is just not one large housing market; it's made up of many small housing markets. So you have to make certain you're knowledgeable on that market. And so we feel the best way to do that is to go in -- we teamed up, we purchased a company, Colonial Homes, in February. They had a good land position, as well as tracts on several other key positions that they were working on, and prior ownership maybe would have been a little reluctant to do those deals -- great deals, we think. So did they. And we were able to bring our capital to those positions and take advantage of them.

And up in Orlando -- there through a Greenfield startup. We hired local management, been in that market since the early '90s, got the contacts, knew some good positions. And you have to compete for those positions, but obviously you just don't want to go to any market. We feel that all the communities that we bought there are A locations, and that's what our business model has been everywhere else.

In order to get those 5,500 lots, we saw many, many more than that. So I'd say we started out with a great foothold in Fort Myers/Naples, and we're penetrating Orlando very nicely, as well. So it's really done through local expertise.

In those communities you got in Orlando, for example, how many of those situations were you sort of in a bit of a footrace against one of the other large public builders?

Well, I would say that the first several were more relationship-driven, where they had confidence in the guy that we hired. And yes, there were other people that were working those deals, but we were able to get in and convince them through what we've done in other markets and sell -- what the Meritage story and how we're going to be a player down here, and getting in with us is going to, long-term, be a good situation for those guys. And that's how we sold the story.

I'd also say, Steven, the quality and the upside potential of the land that we got with the Colonial Homes acquisition has really exceeded our expectations.

And also, the sellers of Colonial carried back substantially all of their land that they owned for us under a rolling option arrangement.

Great. Congratulations on a good quarter, and thanks for the good responses.

Margaret Whelan, UBS.

Very well done. Great quarter. I have a couple of kind of longer-term questions. The '06 to '09 growth that you're forecasting -- what percent of that do you think will be organic versus acquisitions?

I would say probably at least two-thirds of it or more will be organic.

Just based on the platform you will have this year?

Yes. We will continue to make acquisitions, but I think they are generally going to be similar to the ones we've made in the past, where they are generally smaller companies doing $100 to $200 million in revenue, but platform that we can grow relatively quickly.

Can you give us an idea of which market you're not in yet that you would like to be in?

Well, we would like to still enter several more of the Florida markets. I would say that. We continue to look at -- now that we're in Orlando and Fort Myers/Naples -- we've said in the past and our strategy still down there is to be in all the major markets, which obviously would then add Tampa, Jacksonville and maybe looking down to the West Palm Beach/Southeast markets. And there's other markets around the country, too. You look at Georgia and the Carolinas would be ones that if you look at -- that's a large percentage of the housing market, when you combine those three states. And we want to be an active player in all of them.

The second question that I had is around the same, the revenue targets that you are putting up. What do you think or what are you factoring in will be pricing versus units?

Well, generally speaking, we going forward don't assume a great deal of percentage price increase. So most of our projections are done based off of current revenue numbers and current cost numbers. So going forward, we really don't project a large amount of price increases. Most of that is unit-driven.

And just the last question I have on that subject is, if it's going to be unit-driven, how do you think your mix is going to shake out over the next couple of years? Where is it now, in terms of detached versus attached product?

We're doing some attached, but it's still a very, very small percentage of our total revenues, and we don't expect that to change much. It may grow to 5%, but I can't see it going --

So you're not looking at kind of the mid-rise or any of the --?

We're going to do a few of those here and there, but again, it's going to be an almost irrelevant number, I think.

You know, Steven, some of your markets where pricing is getting really high, affordability has been squeezed. You still don't think you will need to do it?

Well, we are making a very conscious effort to drive down our average sales price in all of our West Coast markets. But we are not going to do that by building mid-rises. They could be more two-story, three-story, stick frame, condo projects, townhouse projects, more high-density/small-lot projects, more projects that are farther out in the suburbs to drive down (multiple speakers) to bring them (ph) more affordable. And we moved into Reno this last year, and that is going to help us drive down some of our pricing up there. And we are doing more affordable housing in Phoenix and other markets.

And then, the last question I have is just in terms of this growth trajectory. Do you expect your mix of owned versus optioned land to be the same or to change at all?

We expect that to stay around the 90% level.

Options, that is going to be your goal?

Between 80 and 90%.

Even as you go into Florida and California and some of these markets where it's harder to option?

Well, you really can't buy lots on option in very many places. But there still are -- we have about 20 to 25 land bankers that we deal with that still have a very significant appetite to land bank, to sell off lots on options. So we can bring them into every market that we're doing business in.

You'll just get them involved in the transaction?

Right. A lot of the lots that we have bought recently in Florida, we brought our land bankers in.

And just a last question. Can you give us a sense by your big markets of the trend during the quarter and into July, if you have seen anything really change?

I think things still remain really, really strong. All our markets feel good. We feel confident about our ability to produce the homes. In some of our markets, sales are not really the problem. It's making certain that you can not have your sales too far out in front of your deliveries, and we feel like we have done a good job of managing that.

I was up in Las Vegas last week, Margaret. And the division president up there told me that North Las Vegas is really cooling off. I said well, what do you mean? He said, well, we're only selling six to eight houses a month. And we can only raise prices $5,000 per release. I said, well, what's so cool about that? I mean, that's a pretty good business. And I think that's kind of a good indication. We don't re have waiting lists of 200 people in some of our communities like we used to, but we still have very strong demand by historical standards.

Are you building any specs at the moment?

In the West, I think we have one completed spec house out of WIP of a couple thousand.

So it's all good?

Yes. Margaret, we had 110 completed specs over the entire Company. That's less than 2% of our backlog or less than 2% of our work in progress. So it's a very small number.

Joel Locher (ph), Carlin Financial.

Good quarter. I just wanted to ask you about your ARM percentages, interest only, loan to value and FICO scores -- just those kind of metrics?

Sure. Larry, you want to take it?

These are statistics from our biggest mortgage joint venture. They don't necessarily represent a couple of the smaller ones, but our FICO scores today, year to date, are generally running in the 725 range, which is a very good number. That's actually up from last year. Our average down-payment ratios are running around the 19 to 20% level. That's also up from last year. And ARMs are kind of running in the 40 to 45% range, which is up from last year by about 10%.

But those ARMs typically are five-year ARMs; sometimes they are a little bit lower, two or three-year adjustable. But most of them are in the five-year range. And also, those ARMs tended to have caps of about 2% on how much the rate can go up during their term.

So those numbers don't bother us at all. We think those are very healthy numbers for our mortgage business.

And then, what percentage of the ARMs are interest only?

Of the ARMs, about 25 or so are interest only.

25% are.

25% of the 40% or so.

So only about 10% or so, overall?

Exactly.

And just getting back to the gross margins, just on a sequential basis, it just kind of shocked me on the upside, where your average selling price only increased 2.9 thousand from last quarter, yet your gross margins increased 177 bips, which is about a $6.1 thousand increase in overall profit. So I was wondering, where did you get most of the leverage from? Were the land costs lower, labor costs lower, or was it mostly materials?

John or Steve, do you want to take that, or do you want me to?

Go ahead.

I think most of that is coming from increasing prices and being able to hold our construction costs down. So if I had to attribute it to one thing, I do think it comes from our pricing power and our ability to increase prices and not from cost savings. It's really from ability to hold cost increases down.

I would agree with that.

So it's mostly on the labor front or material front, one or the other?

Pricing power.

Michael Novak, Frontier Capital.

First of all, thank you very much; we appreciate the strong results. My first question is on acquisitions, again. Given the strong results that you have put up and the other large public builders, are you finding that companies like Colonial are more eager to team up with you? And is that leading to, perhaps, faster consolidation?

You know, I think most of the things we look for when we look for an acquisition, obviously, is we look for the market we want to be in. We look for the people side of it. We look for management. And we look for the ability to grow their business. There has to be a fit because, obviously, the acquisition is just the beginning. And then, from there, we want to take that business and really grow it, and we have to have the people and the knowledge in the expertise to do that.

So I think it's more driven by -- as consolidation has maybe in some of these good markets made the deals bigger, it has made the ability to have capital even more important. And so these guys are smaller; they look forward and they say, my gosh, I'm only going to be able to do one deal or two deals a year of any size, because these deals have gotten so big. So in order if I want to stay in the game, I need to team up with somebody I feel comfortable with that they can bring their capital to the table and I can grow my business. I can be in an earn-out situation. And so that's how we have seen it; it's these markets where land is constrained in the deals are getting bigger; it makes it very difficult for a single-market small builder to compete.

How would you characterize your own acquisition pipeline relative to how it has been over the last several years?

Well, I think it's been -- we have continued to be very -- looking at a lot of different things, opportunistic, looking for things that fit into where we want to go strategy-wise to build our company. And we see some opportunities out there, nothing to announce right now. But we think we can continue to be active and find good opportunities for us on the acquisition front over the next several years.

And when you are in this process, are you finding that the deals are sort of a bake-off, or is it more, as you mentioned, relationship-driven and having the fit with the people that you're going to be working with going forward?

I think some of them are, if you will, auctions where all the builders look at them and bids are coming in. But at the end of the day, our model is we have to make certain we don't overpay. We analyze the market. We look at all the assets that they control, the relationships they have. And we want to make certain that we feel confident that that's a business model that we can grow nicely over a three to four-year period.

And so it's a combination -- they may start out as three or four builders looking at them, but most of these are individuals that own their company, and they want to make certain that when they sell, a lot of them -- they are going to stay with the company -- that they feel comfortable with who they sell to, so they can work with them over a three to four-year period.

And then on a different topic, can we get an update on your efforts to ramp up the Nevada market, please?

Well, we have 3,500 lots in Las Vegas. A lot of those lots are at a basis that's almost half of what the land is selling for today. Our goal is to do between 800 and 1,000 units in Las Vegas. We're on our way to doing that. We are probably 18 months away from that, but we're on our way. And we've got, I think, three or four communities now approved and underway in Reno, and we see that as a good satellite market for our operation in Northern California. And we are going to build that up to a few hundred units a year. So things are looking real good in Nevada.

Thanks and keep up the good work.

Jim Wilson, JMP Securities.

Great quarter. I was wondering -- if you look at the new communities you are opening, obviously the count growth is outstanding. But could you color it a little bit, by the major markets, of the mix of what you are opening in the sense of moving more inland and what mix of price points, so we can get a little feel for that, in terms of -- even if average price per home is static, what the mix shift issues might do, be it positively or negatively, over the next 12 to 18 months?

Well, in California we're not building anything near the water, as you know. We're in the Inland Empire in Southern California at Riverside/San Bernardino. Most of the product that we are bringing to market there is in the $300,000 to $500,000 niche. We do have a couple of communities coming late next year that will be in the $800,000 to $900,000 range, but a great majority of everything that we are doing is in that lower price point.

In Northern California, we are out in the Stockton, Modesto, Valley markets. We're in Sacramento. We're, again, trying to keep our prices -- I guess up there, it would be more in the $400,000 to $600,000 price bracket. In Vegas, we're doing some small lots in Phoenix. We are doing a whole variety of product, all the way across the board. John, do you want to talk about Texas and Florida?

Texas and Florida -- I'd say, Texas, we continue to do the same thing. It's mainly suburban product, going to the next -- where the new path of growth is, where the next logical place is to build houses, where shopping is going to the built, on the traffic corridors to get to work, pretty much as what we have done in the past.

And then down in Florida, we will be -- right now, we are moving dirt to open a new community down in the Naples area, which will be about 300 units we have got, and we feel very strong about that piece. It's a piece we got through the acquisition of Colonial. And then, up in Orlando, we're right now in the process of waiting for three new communities to come on in our startup, up there. And those are all suburban, single-family detached product.

John, you're also emphasizing a more value product in Texas, and I think that's one of the reasons why the average price in Texas dropped a percent, because you're seeing more activity in that lower price point?

Yes. We've introduced new divisions, actually, in both Houston, Austin and Dallas that will carry the legacy brand, that will be a value series. And Larry is right; we're going to have, really, three products driving the Texas market. We're going to have the value series under legacy, we'll have our move-up business. Our largest piece of this will be Meritage. And then we are also introducing a luxury production brand that we started out in Scottsdale as Monterey. So will be offering -- up there, we segment the market into three brands, so all three will be active. But that will keep our price -- as Steve said earlier, in all our markets, trying to keep our price down. That will keep our price down in Texas.

Thanks, great job.

Gary Friedman (ph), GM Realty Capital (ph).

I wonder if you'd just comment on what your expectations are for order growth over the next quarter or two, given your current backlog?

Well, our order growth -- well, I guess I'll say traditionally, our orders are seasonally oriented, so we tend to sell more houses in the first half of the year than in the second half. On the other hand, having said that, our comparisons for the next two quarters are against that same trend for prior year. But bear in mind that on a total unit basis, the units are not necessarily as high. And I'm not saying that the units are going down; I'm just saying, overall, the total aggregate units as a percent of the total for the year, for the second half, tend to be a lower percentage of that total.

But I think you will continue to see order rates similar to what you saw over the last couple of quarters. So we do not see a significant swelling of demand in any of our markets. The demand is tending to hold up and be pretty stable and pretty robust.

I guess what I'm getting at, as well, is I know demand is pretty good. Are you sort of facing a little bit of increasing pressure, given the growing backlog, to slow sales a little more? Or is that trending (multiple speakers)?

We have been doing that now for several quarters, and we will probably have to continue to do that, particularly in some markets. So I think our order growth will probably continue in that 10 to 20% range. But dollars will be much higher than that.

The last two quarters, we were 15% in units for the June quarter and 17% for the last six months. Our dollars were in the 40 to 45% range. But those last two quarters really represented our efforts to slow our sales in certain markets, particularly in markets like Phoenix, Arizona, where it has been real, real strong and we were trying to maximize profits and manage our construction capacity.

Greg Gieber, A.G. Edwards.

My question is similar to the last one, but I wonder if you could give us your projected closings for the third quarter and for the full year?

I don't think we've disclosed that information specifically. We've given information on revenues and total closings for the full year, so that's something that, at this point in time, I don't think we're providing.

Okay, well how about the number for the full year, since I don't have in front of me?

Well, I think for units we have been saying something in the 9,000 to, say, 9,400 range -- maybe 92 as a midpoint.

Yes, 2.9 to 3 billion in revenues.

Could you talk about if there has been any change in pricing in the California market? I've heard, in some areas, once again, a little bit of resistance at the higher end. Are you seeing anything different?

We don't have a lot of communities at the higher price point. Most of our product is in the first and second move-up. I don't think we can raise prices as much as we have 6 months to 12 months ago. So there is some affordability issues, but we're continuing to raise prices with every release at least $5,000 to $10,000 in a lot of cases.

In terms of your operations in Southern California, where you are in the Inland Empire, how many communities do you have there? As you look forward to your growth, is your count there small enough that you can just do it by further penetration? Or do you have to think about moving north toward Bakersfield and Fresno, as some other people have done?

Well, we still have a lot of markets in the Inland Empire to penetrate. I think we have -- Larry, correct me if I'm wrong here. I think we only have six communities open right now. A lot of those are selling out of trailers, but we have another seven or eight that are on their way, coming online in the next 12 months.

That said, we're looking at opportunities in the Coachella Valley, the low desert out toward Palm Springs. We're looking at opportunities in the North L.A. markets in the high desert. We are going to be doing some building in Bakersfield and in Fresno, and closing the gap between Northern and Southern California.

It sounds like to have a lot of potential in California, clearly.

We do.

Now, you mentioned earlier in Las Vegas that a lot of the land you are building on or have is sort of close -- sort of almost double the acquisition cost because of the timing. Can you give us the same comparison for California? How long you have had that land, what is at book versus market today?

It's hard to say. Some of the land we have had longer and some of it we've just bought recently. But I would say there's -- as any public builder, there's significant value in our land holdings. If we were to close our doors and sell all our land today, there would be a significant profit to be made.

Well, I thank you, on outstanding results.

Alex Kavarian (ph), JMP Securities.

Again, great, great results. I was hoping you could discuss, in case I missed it, your expectations for your community count in Nevada and in Florida. And if you could break it down between Reno and Vegas, as well as the acquisition you did at Colonial versus your startup in Florida by year end?

Alex, we really haven't broken the community count projections down by any region, and we are generally saying we expect them overall for the Company to be up around 15% from more are today. And I don't think we're prepared to break them down by region today.

Stephen Kim, Smith Barney.

I was looking at your average prices again, and one of the things we do is we impute an average selling price, so like a new order price, from the available data. And when you do that, it looks like your imputed sales price grew very dramatically, from 310 last quarter to about 383 this quarter -- so $73,000. And it seemed to me that perhaps that might be a mix shift associated with California having a big surge in orders and Arizona being down 8% because of the big difference in pricing between those two regions.

My question is, going forward, as we expect to see maybe Texas deliver more units and maybe Arizona, as well -- where do you think, given where things are right now, in sort of a normalized mix of business, where would you expect your average selling price to be running? Somewhere in the mid 3's or more closer to the 383 level that we saw this quarter?

Well, Stephen, the average sales price for orders for this quarter was 343,000.

Oh, it was? So maybe my math is a little off. Okay.

Yes, our closing was 311, our backlog 330, our sales were 343. And I think, as we have been saying, particularly in some of the hotter markets last year like California and Nevada, we're seeing price increases moderate a bit. I still think you'll see those average numbers continue to move up, but probably not the same rate you saw them move up a few -- over the last few quarters.

So going forward, it would be like a 340 type number. And what was that average new order price in the year-ago period?

274.

At this time, there are no further questions.

Well, thank you for joining us for our second-quarter results. We will look forward to talking to again at our third quarter. Thank you.

This concludes today's conference call. You may now disconnect.